MICROFINANCE MISUNDERSTANDINGS

This article identifies five key misunderstandings about the microfinance industry, the first being the perception of exorbitant interest rates. MFTransparency seeks to address this misunderstanding by educating industry stakeholders, publishing accurate, comparable pricing data for microloan products and facilitating informed discussion about the topic of pricing.

There are many claims for and against microfinance. Beyond Profit looks at five key misunderstandings and puts them into perspective.

Exorbitant Interest Rates Claims of prohibitively high interest rates have been blamed for everything from bankruptcy to farmer suicides. Are microfinance institutions (MFIs) charging interest rates to the ruin of poor borrowers? One of the biggest arguments for microfinance is that a poor person would only have access to credit via a local moneylender who typically charges much higher rates and pushes the poor further into a debt trap.

Overlending Are loans being “oversold” to the poor and promoting a life on credit? It is a difficult claim to prove, but earlier this year, Bangladesh-based BRAC admitted to promoting loans to already over-indebted borrowers. Harold Rosen, Executive Director of Grassroots Business Fund, recently noted that mismanagement should be blamed for the industry’s – and borrowers’ – woes, and not the microfinance model itself.

Credit versus Savings and Insurance Access to credit is a valuable service for the poor, but is it the panacea to poverty? MFIs emphasize lending funds more than promoting savings or insurance. Today, MFIs do offer a wider range of financial services, but the emphasis is still on credit. Increasingly, regulators are warming to the idea of MFIs being able to take deposits, both to promote savings as well as to reduce MFI dependence on commercial banks.

Just For Business Growth? Modern microfinance, as it is practiced today, began in the 1970s as financing for poor entrepreneurs to pursue income-earning opportunities. However, small enterprise development and growth are not the only reasons the poor value microcredit. The poor also turn to microcredit as a means to pay for everyday expenses, such as education, electricity, food and housing.

The Urban Disadvantage Does microfinance only work in rural areas? In a village, neighbors know and interact with each other regularly, making self-help group formation easier. But how can that sense of community be translated into the urban context? Rural migrants predominantly represent the urban poor and have developed their own communities in urban settings. Forming a group is a challenge, but a larger one is finding the right people to sell loans – people who can relate to the urban poor and understand their needs without condescension.